Stencil image appearing extremely low resolution
Stencil has to be a power of 2 image, with dimensions of
8,16,32,64,128,256,512,1024px, etc in width or height (512x512, 1024x1024,
2048x2048 or 1024x512, 2048x1024 or 512x1024, 1024x2048, 1024x128, 128x4096 - and so on, as long as it can be doubled or halved by 2) that way Blender will display it correctly. It's a general rule for any 3D texture, actually. 

I know it's an old question, but a lot of people asked me about this lately and they found no direct answers online. So I figured you can never be too late with an answer. :)